Again, the upside is that if you have access to mod_rewrite (or isapi_rewrite), you can easily support both and change your links at will.
The way my sites work, when you enter:
/Illinois/<City>/RealEstate.html
it actually maps to:
/realestate.asp?city=<city>&state=Illinois
You can just as easily write a rule that would convert city-realestate.html the same way.
Like I said, I tried it multiple ways. Google didn't really care much about how I structured the links themselves, but Yahoo! and MSN went bonkers when I changed from querystrings to folders.
I've got a few spare domains... should we run a test?
-Matt